The High Court recently considered whether clause 6.7.3 of the JCT Minor Works Contract 2011 or Part II of the Construction Act 1996 could time bar an Employer from bringing a claim against a Contractor following termination for default or insolvency, in circumstances where an account of the debt was not issued by the Employer within the requisite three-month time period.
JKR Property Development Ltd (the Employer) contracted Farrar Construction Ltd (the Contractor) pursuant to a JCT Minor Works 2011 fixed price building contract to carry out works on 14 June 2014 (the Contract). The works achieved practical completion however before the expiry of the defects liability period the Contractor became Insolvent, within the meaning of the Conditions of the Contract, on 1 September 2016. The Contractor's employment under the Contract was deemed terminated pursuant to the terms of the Contract.
Prior to termination, the Employer had made payments to the Contractor's subcontractor directly, pursuant to a valid variation to do so. Following the deemed termination, some several years later, the Employer issued an account as proof of debt to the Contractor's liquidators for repayment of these sums. This was accepted by the liquidators, but disputed by another creditor, Levi Solicitors LLP, on grounds that the proof of debt had not been sufficiently established including that the account had not been issued as a certificate within the three-month timeframe specified under clause 6.7.3 of the Contract. The Employer disputed that the three-month timeframe applied, and alternatively, that it could rely on s110(B)(2) of the Construction Act 1996 to issue a payment notice outside of the timeframe.
Is there a strict timeframe for issuing a final certificate following a Contractor's termination for default or insolvency?
The JCT Minor Works 2011 contract, and indeed all UK construction contracts, impose strict conditions upon the timing of the Employer's interim and final payment certificates due to the mandatory nature of the Construction Act 1996 payment provisions. However, the Court clarified that clause 6.7.3 is not a payment provision as it does not establish the point at which the payer becomes liable to make payment. Unlike an interim or final payment certificate, where payment becomes due when the payer fails to issue a certificate or pay less notice within the prescribed timeframe, clause 6.7.3 deals with the issue of a certificate by a party which may well be the payee (i.e., the Employer claiming payment from the Contractor). A strict three-month timeframe for issuing an account would not serve the same purpose as the timeframes prescribed in the payment provisions.
Consequently, the Court held that an Employer's failure to issue a certificate setting out the debt owed (noting the debt can be owed by either party) within the three-month time period required by the Contract was not a strict deadline that would time-bar the Employer from bringing a claim, should the certificate not be issued within that period. Rather, the three-month time limit signposted the date beyond which a cause of action for payment accrues. This is consistent with the principle established in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd), that a Contractor's cause of action accrues at the point the Employer fails to issue a certificate and runs until the expiry of the limitation period. It follows that the payee (whether that be the Employer or the Contractor) may bring a claim at any point following the expiry of the three-month period up until the limitation period expires. To impose a strict deadline for the Employer to bring a claim would effectively also result in the Contractor being time barred from bringing a claim (if it turned out to be the payee), which the Court did not accept was the intended meaning of clause 6.3.7.
For the same reasons, s110B(2) of the Construction Act 1996 with respect to default payment following a failure to issue a payment notice or pay less notice did not apply. Clause 6.7.3 requires the payee or a specified person to give the payer an account. The trigger for the s110B(2) right to payment is a failure by the payer or the nominated person to give a certificate setting out the sums that are due for payment, where that payment is unquantified. On the other hand, clause 6.7.3 deals with the balance of the account following termination and completion of works by others.
Wider implications for Contractors and Employers
The High Court has differentiated between strict timeframes for the issue of interim and final payment certificates and the issue of an account of debt following termination for insolvency or default under the JCT Minor Works 2011 contract. The Employer may issue a certificate to the terminated Contractor following completion of the works and making good defects, but if it does not do so within the three-month timeframe, it does not lose its right to bring a claim with respect to the debt.
Terms akin to clause 6.7.3 are commonly found in a range of contracts and so the decision is likely to have wider application than JCT. Both Employers and Contractors should be aware that claims with respect to debts arising upon a Contractor's termination for default or insolvency will not be time barred until the end of the limitation period unless there is express contractual wording to this effect.
The Court's view that the Construction Act did not apply was not developed to consider the relevance of paragraphs 4 to 7 of the Scheme for Construction Contracts which provide that a due date and final date for payment will be implied in circumstances where the Contract does not provide for one. Given the decision in Levi, which effectively does away with any final or due date for payment of the balance of an account following termination or insolvency, we anticipate this being a point of principle that is likely to come before the Courts again.